1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 5901 GREEN VALLEY CIRCLE 3 CULVER CITY, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 OCTOBER 19, 2010 10 CORPORATE FRANCHISE AND PERSONAL INCOME TAX HEARING 11 APPEAL OF 12 VALERIE NELSON 13 NO. 489125 14 AGAINST PROPOSED ASSESSMENT OF 15 ADDITIONAL INCOME TAX 16 17 18 19 20 21 22 23 24 Reported by: Juli Price Jackson 25 CSR No. 5214 26 27 28 1 1 P R E S E N T 2 For the Board Betty T. Yee of Equalization: Chair 3 Jerome E. Horton 4 Vice-Chair 5 Barbara Alby Acting Member 6 Michelle Steel 7 Member 8 Marcy Jo Mandel Appearing for John 9 Chiang, State Controller (per Government Code 10 Section 7.9) 11 Diane G. Olson Chief 12 Board Proceedings Division 13 14 For Board of Anthony Epolite Equalization Staff: Staff Counsel 15 Amy Kelly 16 Staff Counsel 17 For Franchise Tax Maria Brosterhouse 18 Board: Tax Counsel 19 Karen Smith Tax Counsel 20 21 For Appellant: Amber Bridges 22 Representative 23 Valerie Nelson Taxpayer 24 25 ---oOo--- 26 27 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 OCTOBER 19, 2010 4 ---oOo--- 5 MS. YEE: Our next matter, please? 6 MS. OLSON: Our next item is B9, Valerie 7 Nelson. Please come forward. 8 MS. YEE: Okay, Members, we are on item B9, 9 Valerie Nelson. 10 Let me have the Appeals Division introduce the 11 matter. 12 MR. EPOLITE: Good afternoon, Madam Chairwoman 13 and Members. 14 Respondent in this matter issued an assessment 15 for 2003, with adjustments to Appellant's taxable income 16 totaling $19,770 after an examination of the Appellant's 17 federal return was completed by the Internal Revenue 18 Service. 19 The Appellant asserts that she can substantiate 20 the claimed disallowed deductions. 21 MS. YEE: Thank you very much. 22 Good afternoon. 23 MS. BRIDGES: Good afternoon. 24 MS. YEE: If you'll introduce yourselves for 25 the record, you have ten minutes. 26 MS. BRIDGES: I'm Amber Bridges for the Tax 27 Appeals Assistance Program and I am Miss Nelson's 28 representative. 3 1 MS. YEE: Okay. 2 MS. NELSON: Hi, good afternoon, Board. My 3 name is Valerie Nelson. 4 MS. YEE: Great, thank you. 5 Please proceed. 6 MS. BRIDGES: Miss Nelson contends that the 7 Franchise Tax Board's assessment of $1,618 in additional 8 tax liability for 2003 is not correct because she 9 incurred business expenses in two 2003 that should be 10 allowed as deductions on her California tax return. 11 The Franchise Tax Board's assessment is based 12 upon adjustments made by the IRS to Miss Nelson's 2003 13 federal tax return. Applicable law states that a 14 taxpayer must concede the accuracy of the federal 15 changes or prove that those changes and any California 16 deficiency assessment based thereon are erroneous. 17 While Miss Nelson no longer has documentation 18 of her business expenses from 2003, she worked as a hair 19 stylist and did, in fact, incur numerous business 20 expenses throughout the course of the year. In her 21 federal tax return for 2003, Miss Nelson listed $16,901 22 in other unreimbursed employee expenses on her 23 Schedule A form. These deductions included telephone 24 expenses, advertising expenses, work uniforms and 25 vocational supplies, such as hair dye, styling products 26 and styling tools. 27 The IRS is disallowed $13,977 of these 28 expenses. Additionally, the Internal Revenue Service 4 1 disallowed $6,140 of the $6,240 that Miss Nelson paid in 2 rent for 2003. This rent deduction in Miss Nelson's 3 Schedule C form on her 2003 federal tax return. 4 Under the Cohen rule established in the federal 5 tax case, Cohen v Commissioner, a taxpayer may be 6 allowed to deduct business expenses without providing 7 documentation of the claimed expenses. In Cohen the 8 taxpayer was a famous Broadway entertainer and the IRS 9 disallowed his unsubstantiated business expenses listed 10 on his federal tax return. The court believed Mr. Cohen 11 when he recollected all of his business expenses 12 incurred as a Broadway artist. 13 Just as Mr. Cohen incurred legitimate, but 14 unsubstantiated expenses, Miss Nelson incurred 15 legitimate but unsubstantiated expenses as a hair 16 stylist in 2003. 17 And now I would like to ask Miss Nelson some 18 questions regarding her appeal. 19 Miss Nelson, do you promise to tell the truth 20 under penalty of perjury? 21 MS. NELSON: Yes. 22 MS. BRIDGES: What was the time period in 23 question? 24 MS. NELSON: 2003. 25 MS. YEE: Pull microphone right up to you, 26 please. 27 Thank you. 28 MS. NELSON: 2003. 5 1 MS. BRIDGES: Where was your work located? 2 MS. NELSON: In the salon at 13722 Burbank 3 Boulevard, Sherman Oaks, California. 4 MS. BRIDGES: What was your position? 5 MS. NELSON: Hair stylist. 6 MS. BRIDGES: And what was the nature of your 7 work? 8 MS. NELSON: Actually, I work in the studios 9 five days a week. I had the salon just for the 10 weekends, for Saturday, to accommodate people, if it was 11 needed. 12 MS. BRIDGES: And did your rent out a booth at 13 the salon? 14 MS. NELSON: Yes. 15 MS. BRIDGES: Do you remember how much you paid 16 in rent? 17 MS. NELSON: Yes, 120 a week. 18 MS. BRIDGES: Okay. And did you purchase your 19 own supplies? 20 MS. NELSON: Yes. 21 MS. BRIDGES: And what type of supplies did you 22 purchase? 23 MS. NELSON: Shampoo, conditioner, perms, 24 curling irons, blow dryers, hair spray. 25 MS. BRIDGES: And did you pay for your own 26 marketing? 27 MS. NELSON: Yes. 28 MS. BRIDGES: And what additional business 6 1 expenses did you incur in I 2003? 2 MS. NELSON: In the salon, by me only being 3 there on Saturdays, I had my own telephone so that I 4 could retrieve my messages, and (unintelligible) was out 5 of coffee, uniforms, which were like capes and towels 6 that were for the clients that I used. 7 MS. BRIDGES: And what happened to your 8 receipts from 2003? 9 MS. NELSON: So, sorry I can not even recall, 10 it's just been years. 11 MS. BRIDGES: And why did you pay the IRS the 12 additional tax liability it assessed for 2003? 13 MS. NELSON: Well, actually, I just feel I -- 14 it was the right thing to do. I was scared, nervous, 15 not know what to do. I -- really couldn't even 16 understand the problem because everything was legit, but 17 I was just scared. 18 I don't want to have no problems with the law. 19 MS. BRIDGES: So, do you agree with the IRS's 20 determination that you owed additional tax for 2003? 21 MS. NELSON: No, I didn't. But, again to say, 22 I did not know what to do. 23 MS. BRIDGES: So, why are you appealing the 24 State's assessment of additional tax liability for 2003 25 when you paid the IRS. 26 MS. NELSON: Because I felt like it was not 27 right after continuing to pay for something that I 28 really didn't understand. 7 1 MS. BRIDGES: Okay. And why did you claim to 2 have documentation of your expenses in 2003 when you 3 have not provided any documentation so far? 4 MS. NELSON: Because I did. And I provided 5 what I had when I went in for my audit and they did not 6 accept to of the receipts. 7 And I put them up, but I think -- I don't 8 recall what happened, moving, just over the years. 9 MS. BRIDGES: Okay, thank you, Miss Nelson. 10 We have nothing further to state at this 11 time. 12 MS. YEE: Okay, we'll give you time on 13 rebuttal. 14 Okay, Miss Olson, do you want to provide some 15 tissue. 16 Franchise Tax Board, please? 17 MS. BROSTREHOUSE: Good afternoon, 18 Chairwoman Yee and Members of the Board. 19 My name is Maria Brosterhouse and to my right 20 is Karen Smith and we are representing the Franchise Tax 21 Board. 22 The issue in this case is whether the FTB 23 properly disallowed Appellant's claimed Schedule C and 24 Schedule A deductions based upon a federal 25 determination. 26 This is a simple matter of lack of 27 substantiation. Appellant's 2003 return was examined by 28 the IRS and she was unable to provide any documentation 8 1 to substantiate her claimed Schedule A unreimbursed 2 employee expenses and Schedule C, other expenses. 3 Respondent then issued a determination based 4 upon the federal disallowance of these items. 5 At both protest and appeal Appellant has 6 asserted she has the substantiating documents, but 7 although she's been afforded numerous opportunities to 8 provide them, she has failed for do so. 9 I also want to talk about the Cohen rule a 10 little bit. It actually appears, looking at what was 11 disallowed by the feds, that Cohen has already been 12 applied to this situation. She was -- actually, the IRS 13 allowed about $3,000 of the unreimbursed employee 14 expenses from Schedule A and they allowed about 1300 of 15 the Schedule C other expenses. So, I think that's been 16 taken into consideration already. And that the Cohen 17 rule doesn't really apply to the remaining expenses 18 we're dealing with here. 19 Also Cohen -- in Cohen, I want explain to a 20 little bit more about it. The taxpayer was actually 21 able to provide some documents to substantiate his 22 expenses, he just couldn't substantiate all of them. 23 So, what happened was an estimate was made based on what 24 he provided. 25 Here we don't have any documents. So, we can't 26 really make an estimate any further than the feds 27 already have. 28 So, as such, the FTB assessment should be 9 1 sustained. And I'll take any questions you have. 2 Thank you. 3 MS. YEE: Thank you, Ms. Brosterhouse. 4 Please take five minutes on rebuttal. 5 MS. BRIDGES: Okay. In this appeal we believe 6 that you, the Board Members, are the triers of fact, not 7 the IRS and not the FTB. 8 Therefore, if you believe Miss Nelson's 9 testimony, we respectfully request that you grant her 10 business deductions as reported on her 2003 tax return 11 and remove the additional tax assessment. 12 Additionally, it has been established that 13 Miss Nelson was a hair stylist in 2003 and as stylist 14 she did have numerous expenses that are incurred for her 15 business and, therefore, although the IRS has taken into 16 consideration some of these expenses, there were much 17 more that she did incur in 2003. 18 MS. YEE: Okay, thank you very much. 19 Miss Nelson, anything further? 20 MS. NELSON: Yes. When I did go to the IRS 21 with my receipts, I had all my receipts together, 22 organized and paid everything with the credit card. And 23 she just totally disallowed all those receipts and told 24 me that -- basically that if I need to talk to -- she 25 said I need to talk to a lawyer to become more 26 proficient with it. So, I didn't not understand that 27 neither. 28 And it's just all through me for an overload, I 10 1 felt like, because I didn't understand. 2 MS. YEE: Okay, thank you. 3 Let me ask you a question, if I may? 4 Documentation related to the rent you paid for 5 your space or salon chair, is that available? 6 MS. NELSON: Yes. 7 MS. YEE: Okay. Was that among the 8 documentation that you provided to the IRS? 9 MS. NELSON: Yes. 10 MS. YEE: Okay. And then with respect to the 11 other business expenses, what was the nature of the 12 documentation you had previously provided? 13 MS. NELSON: Like supplies -- receipts of all 14 bills I got from the phone company, receipts of towels 15 and uniforms that were being cleaned. 16 MS. YEE: Okay. And then the Franchise Tax 17 Board did -- what did you all receive? 18 MS. BROSTREHOUSE: I didn't receive any 19 substantiating documents. I didn't receive evidence of 20 rent paid or supplies purchased -- anything. 21 MS. YEE: Okay. So, all we have is essentially 22 the adjustments that the IRS had made -- 23 MS. BROSTREHOUSE: Correct. 24 MS. YEE: -- to the two schedules and nothing 25 beyond that. 26 MS. BROSTERHOUSE: Yes. 27 MS. YEE: Okay. All right, thank you very 28 much. 11 1 Questions? Ms. Mandel? 2 MS. MANDEL: Yeah, the Franchise Tax Board 3 mentioned that there was some allowance by IRS 4 already? 5 MS. BROSTERHOUSE: Yes. 6 MS. MANDEL: Did you see that in the -- because 7 I don't remember seeing the IRS -- 8 MS. BROSTREHOUSE: If -- well, I have the fed 9 stars. 10 MS. MANDEL: The fed stars, yeah, I don't 11 remember seeing that. 12 MS. BROSTREHOUSE: And according to that, the 13 total amount claimed for other unreimbursed employee 14 expenses was $16,901 and the adjusted amount, the 15 adjustment amount was 13,861. 16 MS. MANDEL: Okay. 17 MS. BROSTERHOUSE: So, about 3,000 was allowed. 18 MS. MANDEL: Was allowed, okay. 19 MS. BROSTERHOUSE: And then for the Schedule C 20 about 7500 was claimed for other expenses and it says 21 the adjusted amount was 61 -- the adjustment amount was 22 $6,140. 23 MS. MANDEL: Do you have a question, Mr. -- 24 Anthony? 25 MR. EPOLITE: Yes, in looking at the Internal 26 Revenue Service account transcript, in one of the 27 adjustments that the Internal -- that Franchise Tax 28 Board made in this matter was to increase Appellant's 12 1 self employment tax deduction by $347, which supposes 2 that the taxpayer has self employment taxable income. 3 And when you look at the IRS account 4 transcript, it shows a self employment tax liability of 5 $694, which is the $347 times two and when you gross 6 that up by 15.3 percent, that comes out to $4,538, which 7 is what is on the account transcript from the Internal 8 Revenue Service, which seems to imply that the IRS, in 9 their audit, found that there was Schedule C taxable 10 income. 11 MS. MANDEL: Okay. Then I think Franchise Tax 12 Board said there was some -- they thought there was some 13 allowance for Schedule C expenses out of the IRS audit? 14 MR. EPOLITE: But what's confusing is that when 15 you look at Appellant's Schedule C that was presented, 16 there are no gross receipts reported on the Schedule C. 17 So that even if you eliminate all $7,504 of Appellant's 18 claimed deductions, you get taxable income of zero. 19 Not self-employment taxable income of 4,538. 20 MS. MANDEL: Well, unless she didn't report the 21 income on the Schedule C and she reported it on the, you 22 know -- 23 MR. EPOLITE: 1040. 24 MS. MANDEL: -- on the 1040, on the front of 25 the 1040, she prepared the return herself. 26 Yeah, okay. 27 MS. YEE: Thank you, Ms. Mandel. 28 MS. STEEL: I just -- 13 1 MS. YEE: Ms. Steel? 2 MS. STEEL: -- I just want to make clear 3 those -- that IRS deducted some of the expenses there, 4 is that including all of the rent and everything that 5 she had receipts for or -- 6 MS. BROSTERHOUSE: I'm not aware of what the 7 IRS allowed the deduction for because I don't have 8 anything other than the fed stars that shows the amount 9 the feds allowed. 10 MS. STEEL: So, to the taxpayer, do you think 11 that IRS deducted -- do you know what they deducted and 12 you know what's additional that supposed to be deducted 13 from -- 14 MS. BRIDGES: I'm not sure exactly what they 15 deducted, but it came out of the amount she had on her 16 Schedule A form. 17 And her rent, the $6240 was on her Schedule C 18 and they disallowed $6140. So, they did not allow her 19 rent, it appears. 20 MS. STEEL: So, if she paid that rent and she 21 has the receipt, it has to be deductible because it's 22 one of the expenses, right? 23 MS. BROSTERHOUSE: Yes, but I don't have the 24 receipts. 25 MS. YEE: But we don't have the receipts. 26 MS. STEEL: But she provided to IRS. So, if 27 she has a copy of it, then are you willing to deduct 28 from the Franchise Tax -- 14 1 MS. BROSTERHOUSE: If she -- 2 MS. STEEL: -- I mean the State income tax? 3 MS. BROSTERHOUSE: Yes, if she can provide 4 documents, I will take them into consideration. 5 MS. STEEL: Do you -- you say you had a copy 6 and you already provided to IRS. 7 Can you bring your copies? 8 MS. NELSON: Yes, ma'am, yes. 9 MS. YEE: You have the documents available? 10 MS. STEEL: You have the documents? 11 MS. NELSON: For 2003? 12 MS. STEEL: Yeah? 13 MS. YEE: Yes. 14 MS. NELSON: Yes. 15 MS. STEEL: So, what's our next step? 16 If we give 30-30-30 or we just decide today and 17 then ask her to provide and then Franchise Tax Board is 18 going to be deducting that portion? 19 MS. KELLY: No, a 30-30-30 would be the most 20 appropriate method to review what she has. 21 MS. MANDEL: I just want to make sure that -- 22 MS. YEE: Ms. Mandel? 23 MS. MANDEL: She understands what -- that we're 24 getting an answer to the right -- the question. 25 Because what I understood before was that you 26 said, Miss Nelson, that you had provided documents to 27 IRS and IRS didn't accept everything. 28 And I thought you had said that over the years 15 1 you've -- documents have become lost. Do you still have 2 documents or copies of the documents that you went to 3 IRS with? Would you -- 4 MS. NELSON: I still have the rent receipts 5 because the salon -- 6 MS. MANDEL: The rent receipts? 7 MS. NELSON: -- is still open 'til this day. 8 MS. MANDEL: Okay. 9 MS. NELSON: So, I do have, yes. 10 MS. MANDEL: I wanted to make sure that we were 11 on the same page. 12 Thank you. 13 MS. YEE: Yes, Mr. Horton? 14 MR. HORTON: Question of the taxpayer, do you 15 have health insurance? 16 MS. NELSON: Yes, sir. 17 MR. HORTON: Who do you have it with? 18 MS. NELSON: Motion Picture -- I'm a hair 19 stylist, the motion picture on set. 20 MR. HORTON: You don't have self -- you're not 21 self-insured, you know, pay for it, your own health 22 care? 23 MS. NELSON: They take it out of W2s when I'm 24 working through there. 25 Pay for it separately, no. 26 MR. HORTON: All right, thank you. 27 MS. YEE: Thank you, Mr. Horton. 28 Pleasure of the Members? 16 1 MR. HORTON: 30-30-30. 2 MS. STEEL: Second. 3 MS. YEE: Okay, motion by Mr. Horton to allow a 4 30-30-30, seconded by Ms. Steel. 5 MR. HORTON: Madam Chair, if I may? 6 MS. YEE: Yes. 7 MR. HORTON: I would encourage not only just 8 the rent receipts, but any other receipts that are not 9 included in the original or not taken under 10 consideration by the Department from your perspective. 11 And, of course, they will evaluate that from 12 their perspective. 13 MS. YEE: Okay. So, any receipts you have for 14 the 2003 year that could substantiate your rental 15 payments, business expenses, anything else that we could 16 take into consideration, both with respect to what you 17 provided to the Internal Revenue Service and anything 18 else that you may have in your possession, we'd be happy 19 to take to look at. 20 Okay. 21 MS. NELSON: Yes, ma'am. 22 MS. YEE: Ms. Kelly, do you want to describe 23 for Ms. Bridges and Ms. Nelson the 30-30-30 process? 24 MS. KELLY: Certainly. What will happen is the 25 Appeals Division will send you a letter asking you to 26 you provide what can and you'll have 30 days to respond. 27 Once you've done that, FTB will then have 30 28 days to respond to what you've produced. And they may 17 1 accept some, they may disagree. 2 Those briefs will come to the Appeals Division 3 and we'll draft a proposed decision for the Board's 4 consideration. 5 So, that's 30 for you, 30 for FTB and then 30 6 for the Appeals Division and so, it will come back to 7 the Board as a consent matter, not another oral hearing. 8 And the Board will consider a proposed decision based on 9 the evidence you produce. 10 MS. YEE: Okay, great. Thank you. 11 We have a motion and a second for a 30-30-30. 12 Without objection, motion carries. 13 Thank you both very much. 14 MS. BRIDGES: Thank you. 15 MS. YEE: And we'll continue to work with you. 16 ---o0o--- 17 18 19 20 21 22 23 24 25 26 27 28 18 1 . 2 REPORTER'S CERTIFICATE 3 4 State of California ) 5 ) ss 6 County of Sacramento ) 7 8 I, JULI PRICE JACKSON, Hearing Reporter for the 9 California State Board of Equalization certify that on 10 OCTOBER 19, 2010 I recorded verbatim, in shorthand, to 11 the best of my ability, the proceedings in the 12 above-entitled hearing; that I transcribed the shorthand 13 writing into typewriting; and that the preceding pages 1 14 through 17 constitute a complete and accurate 15 transcription of the shorthand writing. 16 17 Dated: December 30, 2010 18 19 20 ____________________________ 21 JULI PRICE JACKSON 22 Hearing Reporter 23 24 25 26 27 28 19